Question

Suppose that planting trees creates a positive externality equal to $25 per tree. Further suppose that the local government offers a $25 per-tree subsidy to planters.
What is the relationship between the equilibrium quantity and the socially optimal quantity of trees planted?

a. The equilibrium quantity is less than the socially optimal quantity.
b. The equilibrium quantity is greater than the socially optimal quantity.
c. They are equal.
d. There is not enough information to answer the question.

Answer 1

Answer:

c. They are equal. 

Explanation:

Positive externality occurs when the benefits of economic activities to third parties exceeds the costs.

Activities that generate positive externality are usually under produced so the government gives subsidy to encourage production .

If the local government offers a $25 per-tree subsidy to planters which is equal to the postive externality, the equilibrium quantity and the socially optimal quantity of trees planted becomes equal.

If the subsidy was greater than the postive externality, the equilibrium quantity would be greater the socially optimal quantity of trees planted.

If the subsidy was less than the postive externality, the equilibrium quantity would be less than the socially optimal quantity of trees planted.

I hope my answer helps you.